Connecting the keynesian cross to the IS curve발음듣기
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Connecting the keynesian cross to the IS curve
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In the last video we hopefully got the intuition between how real interest rates might impact planned investment.발음듣기
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What we want to do in this video is take this conclusion right over here, this hopefully fairly intuitive conclusion right over here and apply it to our Keynesian Cross and think about how real interest rates would effect overall planned expenditure and what that would do in a model like the Keynesian Cross, what that would do to our equilibrium real GDPs.발음듣기
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We know, from many videos now, that an economy is a equilibrium when income is equal, when aggregate real income is equal to aggregate real expenditures.발음듣기
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This is our expenditures. At this point right over here, that should be the same value as what our aggregate income is.발음듣기
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The other part is to actually plot planned expenditures relative to this and then see where they intersect.발음듣기
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For the sake of our Keynesian Cross analysis, and this is kind of kind of what you would see in a traditional intro class, we assume that we have a linear consumption function.발음듣기
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It might be something like our autonomous consumption plus our marginal propensity to consume times our aggregate income, minus taxes.발음듣기
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In the past we viewed it as a constant, but now we know it can actually be a function of real interest rates.발음듣기
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The consumption function right over here is just a line with a positive slope that intersects the vertical axis at some place up here.발음듣기
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It has a positive intersect. All of these, for given interest rate, these are all going to be constant.발음듣기
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We have our consumption, which is a function of Y - T, plus the level of planned investment at ...발음듣기
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Let's say interest rate R1, so at some given interest rate, plus government spending, plus net exports.발음듣기
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This is where along our planned expenditure line, where income is equal to expenditures, or output is equal to expenditures.발음듣기
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We're not eating into inventories in an unplanned way and we're not building excessive inventory above and beyond what we had planned.발음듣기
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Now, we're going have planned investment at R2 and we're going to assume that R2 is less than R1.발음듣기
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Everything else equal, if this thing shifts up, if this term right over here goes from R ...발음듣기
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If the input into it, if the real interest rate goes down, then this whole expression is going to go up and so you're going to have an increase.발음듣기
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We saw that we got to a new level, or we see now that when you shift that up, that investment goes up.발음듣기
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We know from previous videos as well, that this distance right over here is the same as our multiplier times the amount that things got bumped up.발음듣기
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Our multiplier is 1 over the marginal propensity to save, or 1 over 1- the marginal propensity to consume.발음듣기
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The main theme here, the real big picture here as we go on our way to constructing our ISLM model, is really that all we're seeing ... when real interest rates go up, planned investment goes down.발음듣기
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The big takeaway from here is, if real interest rates go up, not only does planned investment go down, that would shift this entire curve down.발음듣기
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If real interest rates go down, then planned investment, because of what we saw in the last video, goes up.발음듣기
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This curve would shift up. If this curve shifts up, our equilibrium GDP is going to be however much this shifted, times the multiplier, so your equilibrium GDP is going to go up.발음듣기
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We can plot this. Economist are famous for not always plotting the independent variable the way you would want to.발음듣기
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It stands for investment savings. What we're going to do and we'll talk more about that in the future.발음듣기
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We plot the convention is to put real interest rates on the vertical axis and to put real GDP right over here.발음듣기
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If you want to look at this relationship, when we have a high real interest rate, we're going to have a low real GDP.발음듣기
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If you want to relate real GDP to real interest rates you get a curve like this, and it's called the IS curve.발음듣기
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IS comes for investment savings. We're really more focused on the I part of it, the way we analyzed here.발음듣기
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The whole reason, based on the logic in this video and the last one as well, the whole reason why we have this relationship is due to real interest rates impact on investment.발음듣기
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If you lower interest rates, then that makes you end up having a lot more investment, like we saw in the last video.발음듣기
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